Gold rallies on above-consensus CPI

Traders see possibility of further upside for precious metal

By

PolyaLesova

NEW YORK (MarketWatch) -- Gold futures rallied to a seven-month high on Wednesday, after data showed consumer inflation rising at a faster-than-expected pace in January, boosting the lure of gold as an inflation hedge.

Gold for April delivery closed up $23 at $684 an ounce, its highest close since July 7, on the New York Mercantile Exchange.

"A powerful reversal lifted gold out of its Tuesday slump and values closed today's session at levels not seen since last spring," said Jon Nadler, an investment-products analyst at bullion dealers Kitco.com.

"Spot gold ignited on the heels of core CPI [consumer price index] statistics and after Tehran's outright refusal to halt uranium enrichment and the pursuit of nuclear power," Nadler said.

Gold futures began their rally after the Labor Department said inflation at the retail level increased 0.2% in January, while the core CPI, which excludes food and energy prices, rose 0.3%. Economists polled by MarketWatch had been looking for increases of 0.1% and 0.2%, respectively.

Last week, Federal Reserve Chairman Ben Bernanke told lawmakers that the Fed expects core inflation to drift lower, but cautioned that the Fed is poised to raise rates if necessary to contain inflation. See full story.

Generally, when people think the Fed's going to raise rates, gold goes down, said Peter Schiff, president of Euro Pacific Capital, based in Darien, Conn.

Today's rally in gold "might be an indication that the Fed and Bernanke are losing credibility and that the Fed is all talk and no action," Schiff said. "The Fed is afraid of raising interest rates, but it can't let the market know that. Gold's saying we don't believe you. You're still on pause."

"The Fed wants to maintain the illusion that they're going to raise rates, because the economy can't stand it," Schiff said.

A recovery in crude-oil prices also boosted gold. Crude futures rose sharply to trade back above $60 a barrel as traders eyed developments in Iran and braced themselves for weekly data on supplies for some measure of how the chilly weather of the past week has impacted higher-than-normal inventories.

Crude for April delivery was up $1.25 at $60.12 a barrel on its first day of trade as the front-month contract on the New York Mercantile Exchange. Prices have struggled to hold above $60 in recent weeks. See Futures Movers.

In the latest news from Iran, President Mahmoud Ahmadinejad said he is aiming to achieve nuclear capability as soon as possible, even to the exclusion of everything else, the BBC reported.

The president made this latest pronouncement to the Iranian Isna news agency. It coincides with a United Nations deadline for Tehran to freeze its uranium enrichment activities or face further sanctions.

"Gold's sharp rebound is apparently being driven by short-covering as opposed to any major news or rethink in the markets," said Brian Dolan, director of research at Forex.com.

However, "higher CPI and Iran noise continue to provide a fundamental basis for firmer gold prices," he told clients.

On the currency markets, the yen slumped to a fresh record low against the euro and one-week low against the dollar Wednesday, after the Bank of Japan hiked its key interest rates but indicated that further rate increases would be gradual. See Currencies.

On Tuesday, gold closed down $11.80 at $661 an ounce, as the U.S. dollar strengthened and oil traded lower, providing an excuse for traders to lock in gains.

"We see yesterday's fall as just flux on the way toward $700 later in the year, as both physical and investor demand is likely to be strong," said Sherry Cooper, chief economist at BMO Capital Markets, in a morning note.

Nadler of Kitco.com said: "The gold market's character now shifts to high volatility and possible de-coupling from conventional drivers. There is little that would surprise us in coming days -- whether that means $700 or $650 gold -- it is all fair game."

Other metals prices also rose on Nymex. March silver futures rose 44.3 cents to $14.273 an ounce, April platinum surged $14.10 to $1,233.20 an ounce and March palladium was up $4.40 at $344.15 an ounce. March copper ended up 6.85 cents at $2.6545 a pound.

William Adams, analyst at BaseMetals.com, said that the base metals held up better than the precious metals on Tuesday, because there was trade buying interest in the former, while "the precious metals have been pushed higher in recent weeks by aggressive investment interest."

"The market may not have to wait too long to see sentiment turn bullish across the board," Adams said. "Don't forget that the January-February period last year was relatively subdued, and it wasn't until March that the rally took off."

On the supply side, gold inventories were unchanged at 7.49 million troy ounces as of late Tuesday, according to Nymex data. Silver supplies added 272,835 troy ounces to stand at 116.54 million troy ounces, while copper stockpiles rose 274 short tons to reach 36,631 short tons.

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